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Ruling

Subject: Expenses for meals and incidentals incurred overseas

Question

Are you entitled to claim a deduction for expenditure on meals and incidentals incurred during the period that you worked for your employer in an overseas country, based on the reasonable overseas travel allowance amount per day for that country?

Answer: No.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You have been working for your employer for a number of years.

Your employer offered you a short term assignment in an overseas country.

The overseas assignment was for a period of several months. The length of this assignment was to be reviewed one month before the end of the expected assignment duration.

Your assignment in the overseas country was unaccompanied. Your spouse and children did not go with you, but they left Australia and went to another country when you were on your overseas assignment.

You were renting a residence in Australia prior to your assignment in the overseas country. You ended the lease and placed your possessions in storage in Australia before going overseas.

For the duration of your assignment in the overseas country your remuneration comprised a standard salary of a specified amount per annum and the following allowances:

· international assignment allowance

· location allowance, and

· accommodation allowance.

Your employer provided you with hotel accommodation for the first month of your overseas assignment. After that first month (which ended before the start of the income year), you were entitled to a monthly accommodation allowance to cover the additional cost of accommodation while you were living away from home in the overseas country.

The letter of offer from your employer refers to the above accommodation allowance as a living away from home allowance (LAFHA), and states that the allowance would not be subject to Australian PAYG tax deductions.

For the first month of your overseas assignment, your employer paid a short term visit allowance of a specified amount per night and a daily expense allowance of a specified amount per day. These allowances were not paid to you but were paid directly to the hotel.

After the first month (that ended prior to the start of the income year) of your overseas assignment, you were entitled to the following allowances:

· international assignment allowance (a % salary uplift, that is your salary was increased by a specified percentage - this allowance was paid monthly, a gross amount of a set amount per month), and

· location allowance (a % location uplift paid monthly, of a gross amount of a set amount per month).

Your employer advised in their letter of offer that both the international assignment and location allowances were subject to Australian PAYG tax, which would be withheld.

You did not receive a separate travel allowance, and you did not receive any other allowances apart from the above allowances.

Your expenses for meals and incidentals overseas were not paid by your employer.

You returned to Australia after your assignment in the overseas country. Your spouse and children came back to Australia after you returned.

Your PAYG payment summary from your employer for the year of income shows gross salary/wages, which includes the international assignment allowance and location allowance that were paid to you because you worked overseas.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Subsection 900-15(1)

Income Tax Assessment Act 1997 Subsection 900-30(1)

Income Tax Assessment Act 1997 Subsection 900-55(1)

Income Tax Assessment Act 1997 Subsection 900-30(2)

Income Tax Assessment Act 1997 Subsection 900-30(3)

Reasons for decision

Summary

The deductibility tests in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) are not met in respect of your expenditure on meals and incidentals overseas, so a deduction cannot be claimed for these expenses. In addition, the substantiation exception, and the Commissioner's reasonable amounts, for overseas travel allowance expenses are not applicable in your case as you did not receive a travel allowance. Therefore, even if your expenditure on meals and incidentals in the overseas country was deductible under section 8-1, the reasonable overseas travel allowance amount per day for that country would not be applicable.

Detailed reasoning

You incurred expenses for meals and incidentals while you were working on the overseas assignment. Your expenses for meals and incidentals in the overseas country were not paid by your employer. Whilst you received an international assignment allowance (a specified % increase in your salary) and a location allowance (an extra % uplift), you did not receive a separate travel allowance for meals and incidentals in the overseas country.

However, the receipt (or non-receipt) of an allowance does not automatically entitle an employee to a deduction. A deduction is only allowable if an expense:

· is actually incurred

· meets the deductibility tests, and

· satisfies the substantiation rules.

Incurred

It is only the actual amount incurred on an expense that may be claimed as a deduction.

The Commissioner of Taxation publishes annually amounts that are considered reasonable in relation to overtime meal expenses, domestic travel expenses and overseas travel expenses. The reasonable amounts are published for the purpose of determining whether the substantiation exception for work expenses of employees that are either reasonable travel allowance expenses or reasonable overtime meal expenses applies. If such an allowance is received and the amount of the claim for expenses incurred is no more than the reasonable amount, substantiation is not required. If the deduction claimed is more than the reasonable amount, the whole claim must be substantiated.

The reasonable allowance amounts do not determine the amount of deduction that can be claimed, but whether substantiation is required. The amount of an expense, which meets the deductibility tests and satisfies the substantiation rules, that can be claimed as a deduction is the amount actually incurred.

Deductibility tests

The basic tests for deductibility of expenses are in section 8-1 of the ITAA 1997.

Section 8-1 deals with general deductions, and provides that a deduction is allowable for a loss or outgoing to the extent to which it is incurred in gaining or producing assessable income, except where it is of a capital, private or domestic nature.

Expenses for meals and incidentals

The deductibility of expenses for meals and incidentals falls for consideration under section 8-1 of the ITAA 1997.

Expenditure on the daily necessities of life (for example, food and drink) is generally not deductible as it is not incurred in gaining or producing income, and is also private or domestic in nature.

Consequently, a deduction is generally not allowable for the cost of meals consumed in the normal course of a working day.

The deductibility of meals consumed while on duty was considered in Case Y8 91 ATC 166; AAT Case 6587 (1991) 22 ATR 3037. In that case, a police officer incurred expenses for meals while performing special duties (for example, crowd control at football grounds). As he could be away from home for up to 18 hours, he was in the habit of buying on location any meal he was prevented from having at home. It was held that the cost of the meals was private in nature and no deduction was allowable.

An exception to this general rule is where the activities by which assessable income is produced involve travelling and staying away from home so that the expenses of travel (including the cost of meals away from home and incidentals) are an allowable deduction. That is, where expenses for meals (and incidentals) are incurred when away from home overnight as a result of travel undertaken in the course of performing duties, such costs are considered to be travel expenses as they are incurred in undertaking work related travel. The expenditure has the character of a working expense, rather than a private expense, because its occasion is the travel away from home on income producing activities.

However, there is a distinction between an employee who is travelling in the course of carrying out the duties of employment, and an employee who is living away from home in order to carry out employment duties for a time at a new (but temporary) workplace. Taxation Ruling MT 2030 (which deals with LAFHA benefits) discusses the distinction.

Therefore, in order to determine whether your expenditure on meals and incidentals overseas are deductible, it is necessary to ascertain whether you were living away from home or travelling on the job when you were working in the overseas country.

MT 2030 states that an employee is living away from home where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at the new (but temporary) workplace. There is a change of job location and an actual change of residence to a place at or near that location. On the other hand, where an employee is travelling in the course of performing his or her job (that is, travelling on the job), the employee does not change job locations but simply travels in order to carry out the requirements of the job.

MT 2030 explains the principles that distinguish between a travelling allowance and a LAFHA, and states that the circumstances in which the allowances are paid are essentially different. It states that a LAFHA exists where the allowance is in the nature of compensation to the employee for additional expenses incurred, or additional expenses incurred and other disadvantages suffered, because the employee is required to live away from his or her usual place of residence in order to perform the duties of employment.

Unlike a LAFHA, there is generally no change of employment location in relation to the payment of a travelling allowance. MT 2030 states that travelling allowances are often paid for comparatively short periods and that as a general rule, where the period away does not exceed 21 days the allowance will be treated as a travelling allowance rather than a LAFHA.

Paragraph 43 of MT 2030 gives some examples of when a person would be living away from home, including a married public servant based in a capital city who is seconded for six months to carry out a special task interstate in circumstances where his family stays behind in the family home. The Ruling states that it is not where the family is that is determinative but where the employee is in relation to the usual place of residence and whether, on the facts, the employee can be said to be travelling on the job or living away from home.

MT 2030 states that a person is regarded as living away from a usual place of residence if, but for having to change residence in order to work temporarily for the employer at another locality, the employee would have continued to live at the former place. The Ruling states that employees who move to a new locality to take up a position of limited duration with an intention to return to the old locality at the end of the appointment would generally be treated as living away from their usual place of residence.

The question of whether it is necessary for an employee to in fact have a residence at a place other than the locality at which the employee is temporarily residing, is considered in MT 2030. The Ruling states that for a person to qualify as having a 'usual place of residence' there is no requirement that it be established that he or she actually have such a residence. It states (at paragraphs 33 - 34) that where an employee does not actually own or maintain a lease on a property, he or she may still be accepted as having a usual place of residence if the employee intends to return to the same city or district to live upon resuming residence in the home country.

In your case, when you worked on the overseas assignment there was a change of job location and a change of residence to a place at or near that location. You moved to a new locality (the overseas country) and had to change residence in order to work temporarily at the new locality. You returned to Australia at the end of your overseas assignment. You were therefore living away from home rather than travelling on the job when you were working in the overseas country.

Your employer also considered that you were living away from home. This is evidenced by the monthly accommodation allowance paid to you. Your employer's letter of offer states that this allowance is a LAFHA and was to cover the additional cost of accommodation while you were living away from home in the overseas country.

You received a LAFHA from your employer which was paid to cover additional accommodation expenses incurred as a result of you temporarily taking up residence in the overseas country to perform your employment duties. This temporary residence was your home, where you lived, for the duration of your overseas assignment. Therefore, any associated expenses incurred in living in the overseas country are private expenses.

The expenditure that you incurred on meals and incidentals overseas was not incurred in gaining or producing assessable income and is also private or domestic in nature. This expenditure is therefore not deductible under section 8-1 of the ITAA 1997.

Substantiation rules

The substantiation rules for work expenses are set out in Division 900 of the ITAA 1997. A work expense is defined in subsection 900-30(1) of the ITAA 1997 as a loss or outgoing incurred in producing salary or wages.

Subsection 900-15(1) of the ITAA 1997 states that to deduct a work expense, it must qualify as a deduction under some provision of the Act and be substantiated by written evidence.

Substantiation exception for overseas travel allowance expenses

Subsection 900-55(1) of the ITAA 1997 provides that a taxpayer can deduct a 'travel allowance expense' for travel outside Australia without getting written evidence on the same basis as for domestic travel allowances, except that written evidence is required for losses or outgoings for accommodation.

The term 'travel allowance expense' is defined in subsection 900-30(2) of the ITAA 1997 as a loss or outgoing for accommodation, food or drink or incidentals incurred for travel that is covered by a travel allowance. A 'travel allowance' is an allowance paid by an employer to cover losses or outgoings for accommodation, or for food or drink or incidentals that are incurred for travel away from the employee's ordinary residence that is undertaken in the course of the employment duties (subsection 900-30(3) of the ITAA 1997).

Taxation Ruling TR 2004/6 discuses the substantiation exception for reasonable travel allowance expenses, and states that for domestic or overseas travel allowance expenses to be considered for exception from substantiation, the employee must be paid a bona fide travel allowance. That is, the amount paid must be an amount that could reasonably be expected to cover accommodation, or meals or incidentals. The Ruling states that an amount for travel expenses that has been folded-in as part of normal salary/wages is not considered to be an allowance.

As a result, an overseas travel allowance expense (other than the accommodation component) does not require substantiation where the Commissioner considers that the total of the losses or outgoings claimed for travel covered by the allowance is reasonable.

The amounts which the Commissioner considers reasonable for the relevant year of income, for the purpose of making an overseas travel expense claim without substantiation are specified in Taxation Determination TD 2010/19.

Whilst your employer paid you an international assignment allowance (a % increase in your salary) and a location allowance (an extra % uplift), you did not receive a separate travel allowance for meals and incidentals in the overseas country. The international assignment allowance which was a specified % salary uplift paid monthly would not be considered to be a bona fide travel allowance, in accordance with TR 2004/6.

The nature of location allowances is discussed in Taxation Determination TD 94/14, which states that a location allowance is paid to attract employees to live in, or continue to live in, a particular (usually remote) location. Therefore, the location allowance that you received was not an allowance paid by your employer to cover losses or outgoings for accommodation, or for food or drink or incidentals.

You received an accommodation allowance from your employer which was a LAFHA rather than a travel allowance. A LAFHA is different to a travel allowance (MT 2030), and as discussed previously you were living away from home rather than travelling on the job.

As you did not receive a travel allowance the substantiation exception, and the Commissioner's reasonable amounts, for overseas travel allowance expenses are not applicable in your case.

Conclusion

The deductibility tests in section 8-1 of the ITAA 1997 are not met in respect of your expenditure on meals and incidentals overseas. Therefore, a deduction cannot be claimed for these expenses.

Furthermore, the substantiation exception, and the Commissioner's reasonable amounts, for overseas travel allowance expenses are not applicable in your case as you did not receive a travel allowance. Therefore, even if your expenditure on meals and incidentals in the overseas country was deductible under section 8-1, the reasonable overseas travel allowance amount per day for that country would not be applicable.